Opinion: State should take advantage of opportunity federal tax reform presents

The Atlanta Journal-Constitution
Gov. Nathan Deal enters the House chamber where he outlined his agenda last month. BOB ANDRES /BANDRES@AJC.COM

“It’s now or never” is a phrase one should be wary of applying to legislation. Even more so than with perennially close-but-no-cigar sports teams — and, sadly, we have plenty of those locally — “there’s always next year” more befits bills that face long odds at the present time.

But I may have found an exception.

While it’s not quite “now or never” for tax reform in Georgia, let’s put it this way: There will never be a better time for the state to flatten and lower its individual income tax, and reap the economic benefits of a simpler, more competitive tax code.

To understand why, let’s review the reason Republicans in Georgia have long failed to get this job done despite their constant promises to do so. There are basically two ways to lower the income tax rate, which for decades has topped out at 6 percent. One is to cut revenues, which legislators are loath to do in a significant way because the state’s tax burden is already fairly low compared to other states (local taxes, which pay for more services here than in other states, are another matter).

The other way is to shift the tax burden somewhere else to make room for a lower income-tax rate. Traditionally, advocates have talked about doing this by raising the state sales tax or applying it to more than just goods (it doesn’t touch services or groceries, to name two examples). The problem is that is an inherently regressive maneuver, which renders it politically unpalatable.

Enter the federal government, which for once has done something useful for the states.

The tax reform Congress passed in December not only broadened the income-tax base, clearing the way for lower tax rates, federally. Georgia, like many states, adopts much of federal tax law when it comes to determining taxable income and whether a taxpayer itemizes deductions or takes the standard deduction.

That means Congress has already done the hard work of broadening the base for the state income tax as well. The only remaining question is what Georgia should do with the windfall. The initial estimate put the figure at $3.6 billion over five years, but I’m told a later, more thorough estimate is far higher — as much as $1 billion per year.

It’s unclear exactly how much of a rate reduction that would pay for, particularly if legislators also take this opportunity to flatten the rates from six brackets between $0 and $7,000 (for an individual) to a single bracket with one rate. But suffice it to say, it should pay for a meaningful reduction even without reducing revenues from their current level. That should calm fears about endangering the state’s AAA bond rating, which lowers the cost of borrowing.

The usual caveats apply here. These are estimates; the actual numbers could be lower, though my understanding is that if anything the estimates are probably on the low side. In this case, there’s also the caveat that Congress set the tax changes to expire after 10 years, in order to comply with the arcane rules of budget reconciliation. No lawmaker wants to lower rates now, only to raise them in a decade. Then again, Congress in the past has extended lower rates before they expired. Even if it didn’t this time, the state could de-couple from the federal code down the road.

To be extra prudent, it may make sense to institute “triggers” for rate reductions. The rate would only fall, or continue to fall, if revenues hold steady. That would help protect against a budget shortage in case of a recession.

However they do it, legislators ought to recognize just how invaluable this opportunity is. They need not throw caution to the wind to deliver some bold changes.